Even Monitor Didn't Believe In Five-Forces Analysis!

Among all the thousands of comments, tweets and other social media brouhaha on my article, “What Killed Michael Porter's Monitor Group?” we also learned something truly astonishing: the Monitor Group itself didn’t believe in the Five Forces analysis and hadn’t used it for years.

If only we had known! If only Monitor had told the world that! What a relief that would have been to all the MBA students who continue to be tortured by it! And all the consulting firms that continue to use the Five Forces thinking in recruitment and consulting cases! And the business journals like HBR that continue to promulgate it as embodying some kind of timeless truth!

Maybe Monitor should have marketed itself as the anti-Porter consulting firm? Maybe that could have saved it? It would certainly have been a differentiator.

Unfortunately the recognition of the lack of utility of the Five Force analysis has not yet reached business schools, many of which continue to teach it as the unquestionable gospel. Moreover, if one looks as the thousands of business cases that consulting firms use to recruit new staff from business schools, one can also observe precisely the same mindset: it is the Five Forces mindset that determines “the right answer” to the problem at hand. Harvard Business Review republished Porter’s 1979 article in 2008 with only slight modifications, with the insinuation that it reflected eternal wisdom.

Hence my article responds to the urgent need to reexamine the worth of this kind of thinking, which remains pervasive, even if its provenance in Michael Porter’s work is not always explicitly acknowledged.

Too much faith in gurus?

The massive outpouring in response to my article suggests that I had managed to articulate concerns that were deeply felt.

Edna Pasher wrote: “Maybe in the Monitor Group the team followed Porter with too much respect for the leader, and this did not allow for new ideas and tools to emerge… Porter has been a Guru for a long time and maybe this success blinded him and his team from openness to different emerging perspectives. This is often the danger with success – that we might lose humility and willingness to constantly check our beliefs and assumptions.”

It is good to remind ourselves of Taiichi Ohno’s dictum that even a wise man is wrong 30 percent of the time. And 50 percent of the things that we normal people firmly believe are just plain dead wrong. The trouble is figuring out: which of the things that I now firmly believe is false?

I believe that although the main thrust of my article that Monitor was killed by the customer, not the Five Forces, is correct, the article could be taken to imply that Monitor’s main or only business was strategy. In this respect, it was incorrect. Readers have pointed out that in addition to helping Ghadafi’s son with background research for his PhD thesis as part of a multi-million dollar deal to establish Ghadafi himself as a genuine intellectual, and promising on its website to generate the chimera of “sustainable competitive advantage”, Monitor also had interesting things going on in innovation (Doblin) and scenario planning (GBN).

As Edna Pasher writes: “We need to co-create the future of organizations with humility. This leads to another insight emerging in this conversation – the age of management gurus seems to be over. Porter has been a Guru and many have followed him blindly and have not dared to ask what needs to change in his well branded toolbox.”

Nevertheless, a brilliant PR achievement?

Charles van der Hoog wrote: “The demise of Porter Group and your article came as a welcome relief to me. It confirms my own experience with them decades ago. The two mainstay books were, frankly, wanting in depth, in my view, (I used to be an econometrist) and not being based in any real experience in markets like I was having then. But, as literally everybody considered them the highest godgiven gospel, I had to study them and try to make sense of it. I have also known the company in Amsterdam itself from very close quarters, even getting inside info. My conclusion was, then, that they were confidence tricksters. And, now, events have corroborated that. However, the history and runaway success of Porter and his group form a very interesting study as a Public Relations and self-promotion case. It was brilliantly done, in every aspect. I have the deepest respect for that. Obviously, there is much to be learned from that.”

I agree that in one sense Monitor was a brilliant PR accomplishment–making so much money from something that “lacked any basis in fact or logic.” In an ethical sense, that is hardly something to be emulated: it has not been good for society.

Nor do I think that such a PR triumph can be emulated. In 1979, Michael Porter just happened to be the right person with the right message at the right time. Pursuit of shareholder value (“the dumbest idea in the world”) was just getting going with a vengeance. The C-suite was starting to realize that they could cash in, big time. Along comes Michael Porter with a rain dance that justifies their cashing in. Porter arrived at just the right time. Hopefully that era is now coming to an end. People are starting to see the rain dance for what it is.

Too much emphasis on innovation?

Kevin Horne also wished that I “hadn’t used the word “innovation” so generally. Either it or ‘Big Data’ is going to win the award for ‘Most Overwrought Meme of 2012.’ It leads everyone to believe they too ‘can just do it.’ And it has already led to dozens too many ‘strategy consultants hanging out ‘Innovate or Die’ shingles of their own…”

I agree that there is a risk of over-use of the term, “innovation”. I have in other articles suggested alternative terminologies, such as “continuously providing additional value to customers or delivering it sooner” or “delighting customers” or “more perfectly performing the job that customers want done” (Christensen). Other writers have suggested still other terms, such as “enchantment” (Guy Kawasaki), “joy” (Chip Conley) and “raving fans” (Ken Blanchard).

But let’s not get hung up on words. What is more important than the particular term employed is understanding the substance: that there has been an epic shift in the balance of power in the marketplace and that the customer is now the boss. Firms will only survive if they respond to customers’ wants and needs in a world in which customers have choices and accurate information as to what those choices are.

It was Monitor’s failure to do this that led to their bankruptcy. In some lines of business, (GBN, Doblin) Monitor appears to have been successful, but overall, it didn’t generate enough customer delight to fund its various activities. We can discuss the various things that Monitor might have done differently to avoid the debacle. Deploying the Five Forces analysis isn't one of them.

Strategy a zero-sum game?

Paul Ward asked: “Nowhere do I see that Porter views a market as a fixed size and that the game is zero-sum. Reference?”

Porter wrote in his landmark HBR article in 1979, “The state of competition in an industry depends on five basic forces… The collective strength of these forces determines the ultimate profit potential of an industry.” The article goes on to explain how to get a bigger slice of this profit potential by positioning the firm in part of the market where there is little competition.

One can see the consequences of this type of thinking in thousands of business cases taught in business school, which generally begin by requiring the student to establish the size of the market and the resultant “ultimate profit potential” of the relevant industry as part of the basic framework for solving the problem. The customer is usually mentioned almost as an afterthought. Details on what the customer might really want are rarely given. Discussion of how shifts in the interaction with customers might have an impact on the size of the market is not encouraged. Changing the interaction with the customer and hence the size of the market are thus rarely part of “the right answer” which is generally about getting a bigger slice of the given profit potential of the existing market, often but not always as compared to rivals.

While not all of this blinkered thinking can be blamed on Michael Porter, as the blame must be shared with the case writers, Porter’s writings have certainly been influential. As Joan Magretta says that “Porter’s ideas are the most widely used in practice by business and government leaders around the world. His frameworks have become the foundation of the strategy field.”

Strategies that people can understand?

Richard Yeager wrote: “As we all know, there are no secret or perfect strategies and the definition of a ‘good one’ changes over time. Therefore, it seems that it is the organization’s on-going ability to create shared clarity across and throughout the entire organizations about its formula for success that will ultimately determine the winners and losers. In other words, an average formula for success that is clearly understood and is able to be ‘translated’ by everyone to what they do and how they do it has a high probability of being well executed and will beat a great strategy that is unclear to the organization every time.”

While I am all for clarity, I am not sure that there are many “average formulae for success” these days. As Tom Friedman pithily argues in his interesting book, That Used to Be Us, “average is over”.

Monitor’s demise wasn’t caused by the Five Forces?

Precisely. The Five Forces were as usual irrelevant. What killed Monitor had nothing to do with competition among rivals, or risk of new entrants or threat of substitute products or bargaining power of customers or bargaining power of customers. What killed Monitor was the fact that customers were not willing to pay sufficient for what Monitor was offering.

Monitor’s main problem was operations?

A number readers wrote that Monitor was killed by poor operations. For instance: “No matter how good the strategy, a business that doesn’t operate efficiently and has costs that exceed its revenue is going to die, and that’s what happened.”

While it is obvious that there were operational problems (e.g. do PR for the Ghadafi regime for millions), the implication of this tack is worrying: as usual, despite the debacle, the strategists in the C-suite are blameless. It’s those poor benighted lower-level munchkins—the operations managers—who should be held accountable. The more cerebral, talented strategic thinkers in the C-suite who don’t dirty their hands with operational matters such as making better products and services can now move on to their next triumph. Sadly, in this case, without an outsized bonus, unless of course they managed to extract it before the current troubles.

Mike Sandman agreed: “Perhaps the root of the problem was that the cerebral, talented strategic thinkers…didn’t dirty their hands with operational matters.” He points out: “When a consulting firm the size of Monitor gets itself into a $51 million cash hole, it has fatal issues, both operational and strategic.”

Knowledge of competitors is important

Divya Dweep Kaur wrote: “Though I agree that dependency on one single product and lack of innovation will ultimately destroy a company. But, I don’t feel that Porter’s five forces is a redundant theory. in order to succeed, one important criteria is the knowledge of competitors. Knowing what they are up to, incorporating the best practices and making a strong defense. There is a lot one can learn from its competitors, the strategy lies behind the correct use of this information…”

I agree that knowledge of competitors is an important component of strategy. What is wrong is to turn it into the whole ballgame.

Thus Albi Beqiraj also wrote that the Five Forces framework was useful if used as one option among others.

Yes, it’s tempting to say, well, there are many frameworks and they all have their merit, let’s use them all. We might decide to do that, but if so, we should keep in mind that Porter’s thinking rests on a foundation of fundamental conceptual errors. The essence of strategy, business and business education is not coping with competition. The purpose of a firm is not to make money for its shareholders. There are grains of truth in Porter’s work, but the conceptual foundations on which it rests are rotten. So we should extract the grains of truth with care.

“The Five Forces helped me”

Some readers complained that in criticizing the Five Forces analysis I was trashing something that they had found useful. I am glad to hear that some people have found help from Porter’s five-forces model.

It is however a bit like saying that we had success for over a thousand years in predicting the movements of the planets with the geocentric model of the universe, so why should we accept that the earth revolves around the sun?

There are ways to reinterpret Porter’s theories, so that they can appear to make sense, as Joan Magretta does in her interesting book, Understanding Michael Porterr. However redefining the true meaning of “competition” as “adding value to customers” is to flout the standard definition of "competition" in any dictionary. It is also not exactly what Porter actually wrote or what is taught in his name in business schools around the world and apparently practiced by leading consulting firms.

There are much simpler and more direct and more fruitful ways of understanding what is going on, without such intellectual contortions, particularly because the world has changed so much since Porter started putting forward this theories. In astronomy, we decided to move on. I believe that it is time to do so in business strategy.

Balance of power shift isn’t universal

Brad Focht wondered whether “the balance has shifted to seller or buyer specifically – this is more industry specific and cannot be generalized.”

The following phenomena affecting the shift in power from seller to buyer are universally applicable: (1) globalization (2) the internet, giving all customers immediate access to generally reliable information as to what is available and its quality and (2) social media that enables customers to communicate with each other.

The impact of these phenomena is happening at different speeds in different industries. But all industries will receive the impact in due course.

At the same time, the internet and social media are huge opportunities for businesses to connect and interact with customers. Inward-looking firms focused on tweaking their own value chain are going to have a tough time of it.

Building moats vs maintaining moats

Tren Griffen made the interesting point “You confuse the ability to identify a moat or the ability to understand the importance of a moat, with the ability to actually create a moat or maintain one. These skills are very different things. People like Ray Kroc and not Michael Porter create moats. To be an investor or professor you need not be able to create or maintain a moat. People like Warren Buffett and Charlie Munger buy barriers. Building them is tough. That an academic consultant would be unable to create or maintain a business with a sustainable competitive or manage that business is not surprising at all.”

The distinction between building moats and maintaining moats is a useful one. “People like Ray Kroc and not Michael Porter create moats.” Exactly. Charlie Munger and Warren Buffett understand that they are unable to create moats: so they buy them, ready-made and then seek to maintain them. The implication that durable moats can be inferred by studying the structure of the industry has turned out to be false. It may have had some plausibility in the 1950s when business was dominated by large oligopolies. It is certainly not true now that power has shifted from the seller to the buyer.

More balanced accounts of Monitor’s demise?

I agree that The Economist piece is a lively read, but in the end, are we any wiser as to why Monitor died or why it did so little in the last five years to avert the obvious impending debacle? The lack of a clear diagnosis is partly because the author appears to share the very assumptions that led to Monitor’s demise. To figure out what went wrong, we need to reexamine fundamental assumptions.